Exploring Innovation in Action: Building Brics – Innovation Capabilities in China

Hshdhehdhhehehhdhcdbdhhddj 5/22/2018 Chapter Summary

Exploring Innovation in Action: Building BRICs – Innovation Capabilities in China

Since economic reform began in 1978, the Chinese economy has grown by about 9–10% each year, compared to 2–3% for the industrialised countries. As a result its GDP overtook Italy in 2004, France and the UK in 2005 and was expected to overtake Germany in 2008. China has a population of around 1.3 billion, and an economy valued at $2.3 trillion in 2006 (for comparison, the UK was $2.1 trillion, the USA $11.7 trillion, and Japan $4.9 trillion). China now has the world’s second largest economy after the USA on a purchasing power (PPP) basis.

The Chinese government has followed a twin-track policy of exporting relatively low-technology products, while using various measures to protect its domestic economy, and providing subsidies to support selected state- owned firms, to build technological capability. This activist technology policy will be tightly constrained in future, after the completion of entry to the World Trade Organization in 2005, and implementation of TRIPS (Trade Related Intellectual Property System) in 2006. These will require stricter laws on intellectual property laws and their enforcement, and limit subsidies and interference with trade.

After two decades of providing the world economy with inexpensive labour, China is now starting to become a platform for innovation, research and development. The actual formal R&D expenditure is still comparatively small, about 1.3% of GDP (compared to an average of 2.3% of GDP in the advanced economies of the OECD, although Japan exceeds 3%), but the Chinese government aims to make China an ‘innovation nation’ by 2010, and a scientific power by 2050, and in 2006 increased government funding in R&D by 25% to $425 million. It plans to increase R&D expenditure to 2.5% of GDP by 2020, in line with expenditure in developed economies. China’s science and technology output is already increasing, and was ranked fifth globally in terms of science papers produced between 2002 and 2005, which is impressive given the language disadvantage.

China’s policy has followed the East Asian model in which success has depended on technological and commercial investment by and collaboration with foreign firms. Typically companies in the East Asian tiger economies such as South Korea and Taiwan developed technological capabilities on a foundation of manufacturing competence based on low-tech production, and developed higher levels of capability such as design and new product development, for example, through OEM (Own Equipment Manufacture) production for international firms. However, the flow of technology and development of capabilities are not automatic. Economists refer to ‘spillovers (wiley_ie_bk_en-GB_wiley-ie-bk_15447_wiley-ie-bk.9.html#wiley_ie_bk_en- GB_wiley-ie-bk_15447_c03-tdef-0008)’